Paulson Event-Driven Fund Said to End Last Year Down 36%

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Billionaire John Paulson
Billionaire John Paulson’s Advantage Plus Fund fell 36 percent last year after a 3.1 percent loss in December, two people with knowledge of the returns said. Photographer: Jin Lee/Bloomberg

Billionaire John Paulson posted the second-worst trading year of his career in 2014 as a wrong-way energy bet added to declines tied to a failed merger and investments in Fannie Mae and Freddie Mac.

The worst performance was in the Advantage Plus fund, which plummeted 36 percent last year, two people with knowledge of the returns said. The event-driven strategy, which uses leverage to make bets on companies undergoing transformations such as spinoffs and bankruptcies, lost 3.1 percent in December, said the people, who asked not to be identified because the information is private. The 59-year-old manager also lost money in a credit pool and special situations fund. He barely broke even in a fund that bets on company mergers, a strategy that comprises about half of the firm’s assets.

Paulson & Co.’s performance placed it near the bottom of the hedge fund pack last year as the industry returned a meager 1.4 percent. The manager, who shot to fame after making $15 billion on the housing crisis in 2007, has struggled to regain its footing since 2011 when bets on the U.S. recovery went awry, losing money in all of its main strategies -- including a 51 percent tumble in the Advantage Plus fund. Paulson also lost money in investments tied to gold and Europe’s economy, causing assets to dwindle to $19 billion, half the peak in 2011.

He told investors that 2011 was “an aberrational year” and the firm was committed to restoring the funds to profitability. Paulson was among the best-performing managers two years later.

Armel Leslie, a spokesman for New York-based Paulson & Co. with Peppercomm, declined to comment on the returns.

Advantage Losses

Paulson’s event strategies lost money this year betting on the preferred shares of Fannie Mae and Freddie Mac, which tumbled in October after a judge ruled that the bailed-out companies didn’t have to share profits with private stockholders. He also stumbled on energy-related securities after amassing the largest stake in Whiting Petroleum Corp. The Denver-based exploration and production firm fell 13 percent today after plunging 64 percent from a peak in August until the end of the year.

The Advantage fund, which employs a similar strategy without leverage, slumped 2.4 percent in December and 29 percent in 2014, the people said.

Unrestricted shares of the Advantage and Advantage Plus funds, which can buy newly-issued securities and were invested in Alibaba Group Holding Ltd., fell 19 percent and 24 percent respectively last year, one of the people said. The event funds had $2.8 billion in assets as of Dec. 1.

Investors in the Advantage fund have lost 48 percent since the end of 2010, while clients in Advantage Plus are down more than 66 percent.

Undergoing Mergers

The firm’s Paulson Partners fund, which invests in companies undergoing mergers, ended the year up 0.8 percent after falling 0.3 percent in December, one of the people said. The merger-arbitrage funds were hurt by Shire Plc plummeting in October after agreeing to terminate a merger with AbbVie Inc. Paulson Partners Enhanced, a version of the fund that employs leverage to amplify returns, fell 1.6 percent in 2014 after declining 0.7 percent last month.

Paulson started the firm in 1994 with the merger fund, and the strategy has been his most successful of late. Over the past four years, the Partners fund has returned 18 percent and the enhanced version has climbed 23 percent. Other hedge funds that invest in merging companies returned 11 percent in the same period, according to data compiled by Hedge Fund Research Inc.

Recovery Fund

The Paulson Special Situations Fund, which recently changed its name from the Recovery Fund, dropped 4.8 percent in December to end the year down 18 percent, said a person with knowledge of the returns. The strategy had $1.6 billion in assets as of Dec. 1.

Paulson’s Credit Opportunities Fund slumped 2.3 percent in December and 4.5 percent during the year after losses in energy-related securities, bank debt and defaulted assets, the person said. The hedge fund firm anticipates opportunities in energy after oil prices plunged and in European restructurings, according to a letter accompanying the returns, said the person. The credit fund has returned 4.6 percent over the past four years.

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